Does your money have your morals?

Daniel Lane
Daniel Lane
Fidelity Personal Investing28 September 2018

Do you know where your money goes when you invest it?

Well, it’s Good Money Week next week so now is the perfect time to revisit your portfolio and make sure you’re happy with the companies you are backing for the long term. And we aren’t just talking profits and revenues.

More and more investors are questioning what it means to be a responsible shareholder and, as generational attitudes towards corporate accountability change, investors are becoming increasingly concerned with matching their money to their morals.

And while it’s true that the entire investment industry is facing growing pressure to adhere to stricter environmental, social and corporate governance (ESG) standards, investors keen to ensure their money is a force for good can turn to a side of the industry designed to do just that.

This is where opinion starts to split among those focused on ethical investment and those solely looking for investment returns. Now, more than ever, I’m not sure that it needs to.

Raising the standard

The ethical end of fund management brings with it images of wind farms and solar panels, and drags up the old conversation around giving up gains to satisfy personal beliefs. It has become all too easy to fall into seeing this side of the industry as a set of niche funds focused on saving the environment but, for Rathbone’s Bryn Jones, investors stuck with these outdated views of ethical strategies might find they are the ones giving up gains over the long run.

While environmental concerns inevitably form part of the conversation, the manager of the Rathbone Ethical Bond Fund says putting too much emphasis on this aspect risks missing the wider scope of ethical funds. Far from restricting investment opportunity, Jones highlights the advantage greater attention to ESG factors affords long-term investment decisions - in the ethical space or not:

“Over the past few years we’ve seen a number of situations where businesses have had very poor governance or have done damage to the environment and investors have lost a lot of money. Investors have started to realise that a sustainable income comes from a sustainable business model with strong environmental, social and governance standards.”

28 September 2018 - Tom Stevenson

Far from eschewing long-term gains, ethical funds’ extra due diligence seeks to weed out companies with subpar ESG standards, which have the potential to hurt shareholders if imprudent practices hit the balance sheet.

A common misconception within the space is that this is where the ethical label ends, but rather than just looking to leave out companies that don’t hit the mark, there is also considerable scope to look for companies that seek to do good. Jones explains his approach: “We have a negative screening process which avoids companies with certain negative practices. These can range from environmental damage, mineral extraction, animal testing and pornography to gambling, tobacco and alcohol production. Then our positive screen looks for evidence of social or environmental change, gender equality in employment and work with charities, among other criteria. So, we’re not only looking at negative things, we’re also looking for something that’s nice and solid that gives a business a strong ethical bias.”

David Osfield, manager of the EdenTree Amity International Fund is equally as keen to point out that ethical investing is more about what goes into the fund than what is left out. He explains: “We do a lot of the things you’d expect from a mainstream manager in looking at the fundamentals of a business, so that’s not in any way sacrificed. In fact it’s augmented by additional levels of due diligence.”

Like Jones, Osfield employs both positive and negative screens but with a focus on adding companies to the portfolio that actively contribute to society. He explains, “We do screen out companies that have over 10% exposure to areas that do harm to society, like tobacco and arms, but really the essence of the stock picking selection is on the positive screening; looking at companies that actually create solutions, that create products that are going to help society tackle some of the biggest problems they can see.

“Looking at how we see companies responding to these challenges sustainably, be it obesity, climate change, waste, etc., drives conviction and allows us to invest for the long-term.”

28 September 2018 - Tom Stevenson

However, both managers also agree that investors should not mistake ethical mandates for philanthropy. Jones is pragmatic, as he explains his strict investment criteria: “We don’t invest in something just because it’s ethical. In terms of our process, it’s very much focused on big themes - we look at the state of a company’s balance sheet and the likelihood that it will pay us back. We look at the valuation - is it cheap enough for us to buy, and then has it got an ethical screen? We think that if you can get those four things together you’re going to get a very good investment.”

So, do investors pay a price for doing the right thing?

No, says Osfield: “There’s been an enormous amount of academic research and commercial investment bank-led research about these strategies and they’ve found a positive approach has led to superior risk-adjusted returns over the long term.

“Also, as the quality of information improves, and as companies really get a handle on what it means to be sustainable and put it into practice, I think we’ll see these companies exhibiting those good behaviours and delivering products which will generate even further outperformance.”

Osfield points to advancements in battery storage capabilities, cheaper access to basic medicine and leaps forward in waste management as areas that benefit society and provide shareholders with opportunity to profit at the same time.

Jones is equally sure that closer attention to socially beneficial investment can lead to positive outcomes for shareholders, stimulating further societal good.

He explains: “it’s a bit of a chicken and egg question really - social return can lead to an investment return which leads to the social return, so you get a virtuous circle and we’re quite often looking for that. In particular, in the social housing space - if you create a community where people want to live, they’re going to pay their rent and property prices will go up as a result.”

More on the Rathbone Ethical Bond Fund and the EdenTree Amity International Fund


Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.